UK inflation fell unexpectedly in December, with the Consumer Prices Index (CPI) dropping to 2.5% from 2.6% in November, according ...

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UK inflation fell unexpectedly in December, with the Consumer Prices Index (CPI) dropping to 2.5% from 2.6% in November, according to the Office for National Statistics (ONS). The slight decrease defied most analysts’ predictions that inflation would remain unchanged last month.

The unexpected dip was driven primarily by a 1.9% fall in hotel prices and slower price increases across restaurants and cafes. Additionally, airfares rose at a much slower pace compared to the same period last year, further easing upward pressure on inflation. However, rising fuel and second-hand car prices partially offset these reductions, the ONS reported.

“Inflation eased very slightly as hotel prices dipped this month, but rose a year ago,” said Grant Fitzner, ONS chief economist. “The cost of tobacco was another downward driver, as prices increased by less than this time last year. This was partly offset by the cost of fuel and also second-hand cars, which saw their first annual growth since July 2023.”

Mixed Signals for Policymakers

Despite the decline, inflation remains above the Bank of England’s 2% target, raising ongoing concerns for policymakers. The broader measure of services inflation, closely monitored by the Bank, dropped to 4.4% in December from 5% in November.

Former Bank of England policymaker Michael Saunders noted the government would be relieved by the results.
“Downing Street will be breathing a sigh of relief after the surprise dip in December inflation,” he commented.

Chancellor Rachel Reeves acknowledged the challenges facing families, stating:
“There is still work to be done to help families across the country with the cost of living. I will fight every day to deliver that growth and improve living standards in every part of the UK.”

Broader Economic Context

The latest inflation data comes amid a period of turbulence for the UK economy, with stagnant growth, a sharp drop in the value of the pound, and borrowing costs reaching decades-high levels in recent weeks.

Luke Bartholomew, deputy chief economist at abrdn, highlighted the broader risks:
**”There are still material growth and inflation risks facing the UK economy, with policymakers highly focused on seeing how firms will respond to the increase in national insurance and minimum wage coming this spring.

“But for now, this slightly softer report should help reassure investors that the Bank of England can continue with its gradual easing cycle, and we expect the next rate cut in February.”**

For now, while the unexpected dip in inflation offers a momentary reprieve for policymakers, challenges surrounding economic stability and household costs remain firmly in focus.

James Burgess, Head of Commercial and insolvency expert at Atradius, says:

“UK inflation dropped unexpectedly to 2.5% in December, defying predictions of a stagnant 2.6% or an increase. This signals brighter economic prospects for 2025.

“Businesses and consumers have reason to feel optimistic, with the possibility of an interest rate cut later this year further boosting the UK’s financial outlook.

“However, households may remain wary of rising winter bills, especially those on fixed incomes. Combined with the Labour Government’s unpredictable actions, this news offers a cautious UK-wide lift.

“With business insolvencies still high, firms must tread carefully prioritising liquidity, diversifying supply chains, and securing credit agreements with insurance to mitigate risks.”

Kate Nicholls, Chief Executive of UKHospitality, said: “While it’s positive there has been a slight dip in inflation, there has not been enough movement to calm the fears among hospitality businesses that we’re entering a troubling period for the economy.

“This will only get worse as we head towards April, when £3.4 billion of costs will be levelled on the hospitality sector. These damaging costs are forcing businesses to slash investment, cut jobs and raise prices – none of which will drive economic growth or help reduce inflation.

“We desperately need to grow away from stagflation, and that starts with rethinking the planned changes to employer National Insurance Contributions.

“A pause will mitigate the negative impacts on businesses, team members and the economy that these changes will bring, and it will give the sector some breathing space to work back towards investment and growth.”

Paul Noble, CEO of Chetwood Bank, said: “Some good news to start the year for Britons. Many will have approached today’s result with some apprehension, but 2025 can begin on a positive note despite the uncertainty.”

“The economic environment is still nowhere near stable, with inflation yo-yoing back and forth from the 2% target. The uncertainty surrounding the budget has not dissipated, but these figures will help to calm nerves nationwide, at least in the short term. However, the spectre of public sector wage increases will keep experts guessing as the year goes on, and the Bank of England will be watching CPI closely as they consider the timing of their next rate change.

“The one thing that consumers can control is their financial future, and it’s more important than ever to be proactive in seeking out the best savings opportunities. Financial institutions must support them by providing accessible solutions and products that add real value.”

Mike Randall, CEO at Simply Asset Finance says: “With inflation holding steady, SMEs will feel a lukewarm start to the year, casting doubt on the much-anticipated interest rate cut to warm the economic climate and kick-start 2025.”


“For businesses, this news may feel like confirmation of their fears, as many consider price adjustments ahead of April when living wage and national insurance increases come into effect. Despite this, many still show optimism for growth. Almost a fifth of SMEs we recently surveyed (19%) said they were more inclined to invest in their businesses following greater clarity on the government’s economic roadmap. Additionally, 43% expressed optimism about infrastructure improvements announced by the Chancellor.

“The full extent of the Government’s plan remains to be seen, but it is vital that we support this dedication to growth. This will ultimately form the backbone of the UK economy’s recovery, and steer us towards meaningful growth.”

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